THE MONEY MANAGEMENT IS ESSENTIAL IN FOREX TRADING

Every trader that decides to dedicate some money to an operation on the forex market must devote part of his time to investigate both the technical side (charts, economic data, etc...) but also that of the so-called money management during the various phases of trading.

Trading is an investment in which the trader should try to get the highest possible return with the greatest possible chance. But nothing is 100% safe and sure and therefore investors should allocate their money wisely to avoid burning everything at once.

Basically, it is absurd to bet the whole capital as there is no certainness about a victory. Instead, allocating the capital among various operations allows the trader to participate in market movements even in subsequent sessions, even assuming that the first operation was unsuccessful. The emotion leads us to be very safe especially in the early stages because of the enthusiasm (or during stages of greatest despair when we risk all out), but being lucid and objective at all times will help the trader to keep different options for new opportunities.

Of course, in order to get enough money (and margins) to jump into another trade, the main mechanism of money management is the stop loss. Putting a limit to the actual losses of a trade while the trade is still open is essential to be able to survive even in excessively volatile market phases.

In order to do this, it is obviously necessary to have a good knowledge of the platform and the mechanisms of inclusion and change of the stop loss number (or take profit if we think about the profit), but also of the trade risk-return ratio that we have just started. A stop loss placed at the same distance as the profit potential that we are expecting does not make much sense in probabilistic terms. It would be different if the potential profit / loss ratio were at least 2:1.

In the definition of stop loss we have to consider technical analysis, a tool that allows us to define a priori certain levels of resistance or support on which the market will tend to converge in the case of failure of certain price levels.

The money management also provides the perfect awareness of how much we can risk in a trade. If the amount of the trade represents an important part of our disposable income, then we have to carefully evaluate the operational choices because, if we lose everything in one fell, then it would be almost impossible to operate for an extended period due to the early depletion of the available monetary resources. In order to handle this problem we must fix a priori a maximum percentage of money in our account to use on every trade. For example, a percentage between 5 and 10% of the money lying in the account already represents a significant risk for traders especially beginner ones.

In order to help the trader to set stop loss levels or the margin used for each trade, some free tools offered by brokers such as junomarkets could be very useful in trading by making the money management easier and more comfortable.